Working papers

A Macro-Financial Model of Monetary Policies with Leveraged Intermediaries

(joint with Adrien d’Avernas and Matthieu Darracq Pariès)

Abstract: This article presents a macro-financial model in which the balance sheet of leveraged intermediaries plays the key role in the transmission of monetary policies. We introduce frictions in an inter-bank money market to create a role for central bank reserves as the ultimate mean of settlement in a standard intermediary-asset pricing model. This simple addition produces a unifying theory rationalizing simultaneously how (i) heightened frictions in the money market affect asset prices and the supply of credit (ii) conventional monetary policy is implemented by varying the supply of excess reserves and (iii) unconventional monetary policy can ease a decline in asset prices by extracting liquidity risk during a liquidity crisis.

This article was awarded the 2018 Distinguished CESifo Affiliate Award in Macro, Money and International Finance.

When Short Drives Long: Endogenous Risk, Innovation, and Hysteresis

(joint with Adrien d’Avernas)

Abstract: We propose a transmission mechanism from financial cycles to aggregate productivity growth.  We provide a structural macroeconomic model with heterogeneous risk aversion and endogenous productivity growth in which the financial sector is key in screening and absorbing innovation risk.  Shocks to innovation levels and volatility generate financial cycles. During financial stresses, the financial sector becomes undercapitalized and reduces its exposure to innovation risk.   As a consequence,  willingness to take risk in the economy is reduced, and less innovation occurs.  Using a large database on the U.S. financial sector from 1973 to 2014, we show that the combination of undercapitalization and heightened uncertainty generate large time-varying risk premia, safe asset shortage, and hysteresis in productivity growth following financial crises that are quantitatively consistent with empirical observations.  We derive macro-prudential policy implications of the arising trade-off between short-run growth and financial stability.

A Solution Method for Continuous-Time General Equilibrium Models

(joint with Adrien d’Avernas)

Abstract: We propose a robust method for solving a wide class of continuous-time dynamic general equilibrium models. We rely on a finite-difference scheme to solve systems of partial differential equations with several endogenous state variables. This class of models includes the frameworks (among others) of He and Krishnamurthy (2013); Silva (2015); Brunnermeier and Sannikov (2014); and Di Tella (2016).